Market Analysis: Elaine Kub

Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, good to have you back with us. A lot of things have been happening obviously in this market, and one of those is we have been trying to keep track of this wheat crop, which the U.S. seems to be in decent shape, including up North. So, some good news there. A lot of interest in how much the corn crop down South has been planted, and there will be an update on that in a big way next week. That seems to be moving along rapidly, and it looks like corn planting in the Midwest is moving along rapidly. Now with this move in soybeans, there's some wonder about how many acres we're going to switch back and forth. So with that as a backup, we've got a USDA Report coming out Tuesday, if memory serves me. So, a lot of things happening there. Let's talk about the wheat market first. Tell me what you see happening there. Obviously we backed off on wheat on the board a little bit this week. But there seems to be a renewed interest in wheat. What do you see going forward? Kub: Well, like you say, the fundamental situation for wheat has been bearish for some time. It is interesting to see these crop condition ratings come out now. And we have good to excellent ratings, 58 percent, in the southern plains for the hard wheat, and that's excellent. I mean there's certainly areas of Colorado and Texas and Oklahoma Panhandle that are still suffering from that drought, but the thing going forward is to watch that Minneapolis spring wheat contract continue to build that spread that it has built over the winter wheat contract, simply because they've had very fast planting, but going forward, is the drought in the Northern Plains going to become more severe and become more of an impact on the market? So there's that going forward that could be bullish, and there's also just the general global demand for feed grains that could, you know, bring in some sort of bullish news to the wheat market. Pearson: Do you want to make any sales at this point on wheat? Do you want to sit tight? What's your strategy here? Kub: I guess I would sit tight and give it the opportunity to be pulled higher by some other bullish influences. Pearson: All right. Let's go and talk about corn because, let's face it, that's driving everything else, including a lot of planting decisions. Right now there's been a lot of anhydrous applied. There's been a lot of chemical applied, and people are ready to plant corn. The idea of acreage shifting seems somewhat remote, but with this bean rally, I mean who knows. Let's talk about the corn market first, though. Big acreage according to the USDA. We're also looking at a tale of two crops. We've been talking about it really for four months now. That's this very tight old-crop condition, and it's even tighter with this last USDA Report, and kind of a scramble to get this crop in early and hopefully sell some corn in the 2011-2012 marketing year. Kub: Yeah. Like you say, looking at the new-crop math, it's very easy to become very bearish. It looks very bearish, but in order for it to be bearish, you have to believe, (a) all of those acres are going to stay with corn and not get switched over to beans at the rally they've been buying acres. Pearson: or not get planted, depending on what happens. Kub: Or not get planted and (b) you have to believe that you're going to get some sort of an average yield, which I think is quite questionable, particularly when you think to get 95 or 96 million acres, you've got to bring in a lot of marginal acres, and we've got a lot of sections of this country that are under the threat of drought, even a band across Illinois is looking like a little bit of a drought. So, you know, going forward, it's hard to picture much more bearish news coming in. The things that come into the corn market now seem like they can be slightly bullish tweaks to the new-crop market. Pearson: All right. Well, we all come down --it all comes down to farmers making decisions, and there's been this confusion over just how much corn remains of farmers' hands. I would make the argument-- and I think that you would too -- that there's a lot of corn in farmers' hands waiting to make sales in this summer transition period between old and new crop. Kub: Well, from that Grain Stocks Report, it actually shows only 25 percent is left on-farm stock. Pearson: That's still a big chunk. Kub: That's a big chunk but it's historically not huge, and it's interesting to see the commercials are getting in there. They have a lot of coverage in the futures market. You can see and sense that they want to get a lot back in for that June/July time frame, but they haven't really reflected that yet on the basis bids yet. I expect that June/July basis market to perhaps it much hotter as go towards that timeframe, and you see a lot of bullishness for that July --you know, summer time frame. Pearson: So you're withholding on maybe that July/August period. Kub: For the limited amount -- or whatever amount somebody has left of old crop, yes, I think the old crop market will certainly be bullish, and I think the new-crop market, you know, it's certainly possible if all of these bearish things come true, we're going to wish we had sold a lot more at this 575 level, or if we ever get 575 again, but I think at this point, I'm just kind of sitting back because I think there are a lot of opportunities for bullish news to come in as the season progresses. I mean we haven't really even got this stuff in the ground yet. Lots of things can happen. Pearson: Yeah, that's right and a lot of things can happen, and we always get some kind of weather scare, and there is this correlation between warm winters and warmer summers. We certainly had a warm winter and a very warm spring so far in the key corn growing regions. Kub: Exactly. Pearson: Okay. So you're not in a big hurry to make additional sales, new crop, and you're not in huge hurry to sell old crop because you think you can get a better opportunity out there. Let's talk about soybeans. They've been the glamour crop here of late. Is this big hedge money coming into the soybean market too? Is that part of this? Is this some of the Big Wall Street money? Kub: Well, there's a lot of --it's a record larger net long speculative position for soybeans, but what's interesting is that the commercial side of the market is also very long in soybeans because they are legitimately concerned about running out of soybeans in the world globally speaking as we get through the next six months. When it comes next fall, the world is going to need soybeans that we have and we're going to be pretty much the only place that they can come get them from because, as we know, the South American crop has been disappointing. So, you know, it's very tempting to want to sell $13 cash beans for new crop but, again, I'm sitting on my hands because there's certainly reasons to think that you might get slightly more bearish acreage numbers coming in for soybeans as the summer goes on, or that you have this incredible net long that could certainly get washed out in a big flood. I think that might be bearish, but you also sense --I sense that the commercials, if there was some sort of a pullback on the futures, the commercials would come in and buy in on any breaks and legitimately stay long, and there are real reasons that, even though you say the market is technically overbought now, there's nothing to say it's not going to keep being overbought for any number of months yet. Pearson: So as tempting as these prices are, and I'm looking at new crop now, you don't want to just unload and unload 2012 and 2013? Kub: Not yet. I mean I think that certainly it bears watching, particularly if we see the dollar continue its rally. It certainly bears watching to not let these prices slip away, but at this point, if the old-crop continuous chart can break over that 1450 level, it never was able to make it over that in 2011, but it's within striking distance here over the next week. If it breaks through 1450, I think you're going to see even more money coming in. Pearson: At 1450, what would be your next level of resistance? Kub: Well, you hear people talking about $15, just as a psychological level. I mean there's really no limit to where it could go. Pearson: All right. Well, it's going to be interesting to see. Obviously, conditions appear to be good for most of the Upper Midwest planting. You mentioned, rightfully so, some very dry areas. That's causing some concern. Planting -- corn planting across the South has gone very quickly. Let's talk about cotton. A big selloff there this week. Kub: Which is odd because cotton was one of the six crops on that Prospective Plantings Report. There were only six crops that lost any acres. Soybeans were one, oddly enough, and cotton. Brazil and India's cotton is also disappointing from a production standpoint. So there are things that can sort of keep a floor under these cotton prices, but I'm not expecting to see them be able to manage much interest or $95 again. Pearson: And not retest last year's levels, barring the weather problem. All right, let's talk livestock. We've had a selloff in the beef business. We have the situation that we referred to earlier in the show about the lean finely textured beef and the ridiculousness of this whole smear campaign against that product. You know it had to have an impact on beef consumption, with some grocers pulling it off the shelves for whatever reason. Where do you see us going short term? Have we backed things up? Did we get little bit ahead of the production curve? Has the consumer backed off? Is that what hurt us or did we back up some cattle? Kub: Well, I think there's a number of things that are legitimately bearish and there's also this consumer, which you could consider to be an overreaction. You'd hope that that would stabilize. But the export news over the past couple of weeks even from Korea and Mexico has dropped compared to last year. And what's really interesting is that you look at the bearish factor of these higher carcass weights; that particularly pays into the lean, finely textured beef in that a higher --a heavier carcass has more of that beef fat trimmings. This is the stuff that people don't want at this point in time. So there was a lot of legitimately bearish news that came into there. So I would expect to see, if all the news is in, if we're just trading going forward, I would expect to see the cash market continue to sort of linger around that 120 level. But at this point, futures are at quite a discount to level, and there's still a lot of long speculative interest in the lean -- in the live cattle futures market that could still be washed out. Eventually long term, you would expect to see that discount start to close up. Pearson: All right. Give me some prices. Where do you think we're headed for fed cattle? Kub: Well, like I said, I think legitimately, it could linger at that 120 level here for the foreseeable future. Pearson: Okay. All right. Calf market had been strong. It took it on the chin too, but not too bad this week on the futures. Cash market things have slowed up quite a bit. These formulations that are making this thing work have really fallen apart. Where do you see the calf market going? Kub: That market has dropped $14 in the past month. I just wanted to put that out there. I mean that was a gigantic drop. Going forward, it's interesting to see, you know, over the past six months, let's say, that the feeder cattle market has sort of, you know, disinterest --like it has been disinterested in the feed market. It hasn't had that same relationship that it historically has had, but I wonder if this reluctance to buy summer feeder cattle is sort of related to the idea of higher-priced feed coming down the line. Pearson: That's certainly a possibility. Let's talk hogs. What do you see happening there? A better week on the board this week. Are we seeing some better export numbers for pork? Kub: Not really. The export news long term has been bullish and will continue to be, but in the short term the past couple of weeks, they have not been outstanding. There is also the situation of higher carcass weights coming in compared to last year in the hog market. The Hogs and Pigs Report showed that we have a higher inventory in this country, we have a higher breeding inventory, we have higher litter sizes. So there's a lot of bearish factors that are going to probably keep a lid on that market. The nearby contract is within 50 cents of going to $94, but I suspect it might run into some resistance there. Pearson: We have more pigs than we thought we did; didn't we? Kub: Yes. Pearson: and that's going to put some pr --we've got about 15 seconds left. Kind of give us your target on these hog prices going forward for the next quarter or so. Kub: Well, I think they might continue to be pressured by the overall livestock market. There's not a lot of interest going to be from the speculative market coming in to be more long at this point, so I think they will struggle to reach any new highs. Pearson: All right. As usual, appreciate your insights very much. Elaine Kub joining us this week. That's going to wrap up this edition of "Market to Market." If you'd like more information form Elaine on where the volatile markets just may be headed, a smart thing to do is to visit the Market Plus page at our website. You'll find exclusive information including expanded market analysis, audio podcasts, streaming video of our program, and links to our Twitter Feed and Facebook page, exclusively at the "Market to Market" website. Make sure you stop by. And of course, make sure that you join us here next week when we will examine the market impact of USDA's latest estimates on global supply and demand. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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